Jay Francis Llave Advocis member  "Create and Protect Wealth" Contact Information Address 1867 Yonge Street Suite 600 Toronto, Ontario M4S 1Y5 Office 416-487-5210 Fax 416-487-7940 Cell Phone 416-660-8881 Email Jay Llave by appointment only

Languages Spoken: English and Tagalog Specialties: Insurance and Financial Advisor Small business owners and Professionals Financial Analysis process: Our recommendations, plans, and management are made only after a thorough discussion and evaluation of your goals and financial situation. The evaluation is divided into several specific areas: Identify Goals and Objectives Financial Assessment - Organize financial data into various financial formats, to provide a foundation for planning. Financial Independence - We create a projection of the future “at-retirement” value of your investments, pensions, RRSP's and expected social benefits. Portfolio Building and Investment Analysis - We review all of your investments and provide recommendations among different types of assets with a view toward fulfilling your financial planning objectives. Insurance Planning - We recommend life insurance products to mitigate risk or enhance business or estate planning outcomes.  Living benefits are another tool in the management of those risks, as part of the larger objective of achieving financial independence Tax Planning - We assess the effect of income and estate taxes in your plan and determine the best strategy to minimize or defer such costs Estate Planning - We assess the need for an updated will, trusts and trust services and provide advice on charitable gifting and estate planning. We provide a systematic approach to crafting a customized plan for each client. History and Introduction: Jay began his career pricing, packaging and the evaluation of fixed-income securities in 2004 for banks in North America, Germany, Switzerland, and Japan. Jay had the foresight to rebalance his and his clients’ assets in January of 2007. A great 7 months prior to the beginning of the current significant correction. With 2 new beautiful children, Jay has focused his efforts to enabling and insurance/financial advising entrepreneurs, their families, their advisors, and small business’s with life of over 5 years. Jay believes that only through the creation and the continuation of small businesses will our economy thrive. Jay is an Advocis (The Financial Advisors Association of Canada) member and is licensed by FSCO (The Financial Services Commission of Ontario).

Benchmark

In 2008, at age 65, the income for the lowest tax rate and highest government credits is $31,524.

Two before-tax incomes of $65,000 or less equals to $8,345 per month after tax income. This is the equivalent of two pre-retirement incomes of approximately $70,000 or one individual income of $153,000 while only earning $63,048.

The tax system, when used most efficiently, can make a substantial contribution to increasing your after-tax income.  As of the 2007 tax year, retired couples have the ability to split eligible pension income equally (Tax guide line 314).  Splitting income can be extremely beneficial because, in Canada we live in an increasing marginal rate of tax world. When your income crosses particular thresholds, every dollar you earn above that threshold is taxed at a higher rate. It is therefore important to split your incomes equally, as much as possible, to have two lower incomes rather than one large and one small income.

The Canadian tax system provides an age credit to those over age 65 earning less than $31,524 per year (in 2008). This credit will reduce your taxes. The credit can be as much as $5,276 (in 2008, indexed with inflation) per year, per spouse. Therefore, if you can have two incomes of $31,524 each you will pay the least amount of taxes and gain the highest level of credits. In Ontario in 2008 the age credit would contribute to providing a total after-tax monthly income of $4,662.32 (for the couple). Once you reach the $31,524 threshold this amount begins to be "reduced" at a rate of 15% per year.

To put this into context, $4,662.32 per month after-tax is the equivalent of one person earning an annual employment income of $73,500 (before tax). In this case the total tax paid would be $17,363.66. In the example of the 65 year old retired couple with the same after-tax income, their combined gross before tax income is only $63,048 (vs. $73,500) and the tax paid is only $7,100 (vs. $17,363.66). Income splitting and the tax credits have resulted in a $10,000 annual decrease in tax paid!

It is important to also keep in mind the Old Age Security clawback zone. Once you begin to earn an income of $64,718 (in 2008) or more your Old Age Security income begins to be taxed back at a rate of 15% per year. Old Age Security, for those age 65 and older, is approximately $500 per month per spouse. Over a 20 year period of time, $500 per month per spouse is the equivalent of $240,000 of income paid to you from the Federal Government during retirement. The Federal Government is in effect giving you an additional $240,000 to live on. This is virtually doubling the size of your investment portfolio.

If you maximized the income between you and your spouse so that each of you were just under the clawback zone (and were age 65 or older), in Ontario your total monthly after-tax income would be approximately $8,342.62. Is this enough on which to live?

Why is this information important?

Understanding the tax system is extremely important because it helps to answer the question: "If I need more money than the basic guaranteed amounts noted above, which source of income do I draw from first?" By understanding the tax system you can strategically draw the right amount of income from the right source at the right time. By doing so you can maximize the dollars received from the different levels of government while also maximizing your after-tax income.

Here are the questions:

1. What do you need to do to keep your lifestyle and/or taxable income received below $65,000 (each)?
2. Do you need to adjust your expenses?
3. Do you need to reduce your RRIF income or RRSP savings?
4. Do you need to add more money to other "tax efficient" investments?

The likely answer is "all of the above"; brainstorm with your trusted financial advisor.

This number will be used to create the guaranteed income for life, financial independence, managed by a trusted financial advisor and their team of professional partnerships.

To create a guaranteed lifetime income you turn all of your assets to a lifetime pension plan structure called an annuity. If you annuitize all of your investments at the time you retire you will have a guaranteed income, for you and your spouse for life, regardless of how long you live.

To create a guaranteed benefit for your children as well, you should set up a joint last survivor life insurance plan. The proceeds of this insurance plan would be paid to your children upon the death of the last surviving spouse. The additional income from the annuity will go towards financing the cost of the last survivor insurance.

This benchmark is important to measure all retirement income decisions against. Any other option will require more risk always measure the gain against the degree of additional risk. Is it worth to take on additional risks?

 

Tax Milestones

Birth	Open savings account to invest Universal Child Care Benefit. Resulting earnings are taxed in the hands of the child. Open a non-registered account for transfers of capital.
Under 7	Increased child care expense deductions and Child Tax Benefits. Invest in Registered Education Savings Plans and earn Canada Education Savings Grants and Learning Bonds. File tax returns if the child has earned income to build up RRSP contribution room. A "kiddie tax" may apply to certain earnings from private corporations. The child is a dependant for the purpose of Canada Pension Plan disability and survivor benefits. The child is a dependant child for the purposes of the Child Amount.
Age 15	Last year for eligibility for the Canada Fitness Tax Credit and child care expense claims (unless disabled). May qualify for education amount only if courses are taken at a post-secondary level.
Age 17	File a tax return to claim the refundable GST Credit and create room to make contributions to a TFSA-Tax-Free Savings Account.
Age 18	Eligibility to contribute to the Canada Pension Plan. Eligibility to open a TFSA. Contributions to a Registered Disability Savings Plan are based on beneficiary's income. Transfer tuition, education and textbook credits to parents, grandparents or spouse. A $2000 over contribution to an RRSP is allowed.
Age 21	Income earned on deposits of personal injury awards become taxable.
Age 31	Age eligibility for contribution to an RESP ends.
Age 35	Age eligibility for contribution to an RESP ends for a disabled beneficiary.
Age 49	Registered Disability Savings Grant and Bond eligibility ends.
Age 18 to 55	Earning and investing years: file a tax return every year. Invest in a TFSA every year. Make RRSP contributions every year. Open non-registered accounts for other surplus savings. Buy a tax exempt principal residence. Manage debt and interest costs. Grow your personal net worth.
Age 55	Eligibility for a phased in retirement: take company pension early.
Age 59	Eligibility for contribution to a Registered Disability Savings Plan ends.
Age 60	Eligibility for early withdrawal of Canada Pension Plan Benefits.
Age 65	Old Age Security benefits begin; eligibility for Age Amount. Canada Pension Plan Benefits. In home caregiver amounts may be claimable. Conversion of RPP's and RRSP's to pension benefits.
Age 70	Last year for contributing to the Canada Pension Plan.
Age 71	Conversion of RRSP to.RRIF or annuity; maturation of deferred profit sharing plans.
Age 90 to 100	Maximum RRIF payout age, terms of several types of annuities end.

 

Calculators

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Simple Monthly Newsletter

December 1, 2009

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November 4, 2009

Special Report

Economist Forecast Update for US of A

"The present bear market rally has extended further than any bear market rally in the last century.  This rally ultimately is consistent, given application of the strongest stimulus program in the U.S. and worldwide ever. This rally continues to show the characteristics of a bear market rally: a nearly straight up advance with minor pauses and on declining volume. Some of
our technical indicators suggest strongly that we are not yet near a top. However, others have shown extremely overbought short- to intermediate-term readings. The truth is we have been due for a short-term correction, but stocks are also likely to extend their rally for months.

Given that this rally has already broken the records, we don’t want to fight the obvious. The markets keep edging upward, and investors seem to assume that a recovery will continue until there are signs that something is wrong. Those signs have not happened yet, although they probably will begin to occur in the coming months according to our clear long-term and intermediate cycles.  We hold steadfast that this economic recovery will fail by the summer of 2010 (July to August) due to rising mortgage defaults and/or geopolitical factors. It is just a matter of when the leading indicators and stocks pick up this reality. The leading indicators are likely to be ahead of stocks given the recent history.

We have looked at three scenarios, which include a peak on the Dow in late October at 10,119, a peak sometime in December near 10,550, and a more likely peak as high as 11,300 or so around mid- to late February 2010.  What we know for sure is that this crash and rebound cycle has been the trickiest we have seen in the 20 years—so we should be humble, alert, and flexible in playing this. However, we shouldn’t let the markets talk us out of this next crash, as they will go to extremes to do just before it happens. The next crash is likely to be faster and more extreme than the last one!

The markets clearly won’t make this easy. They haven’t thus far!  However, our analysis is equally crystal clear in signaling another major crash into late 2010. Every long-term and intermediate cycle points downward from late 2009 or early 2010 into late 2010 and likely beyond to a lesser extent into mid- to late 2012. Thus far the markets are correcting and the dollar rising, as we expected in late October. In mid- to late October we advised investors to keep their short positions on the S&P (SH) and long positions on the U.S. dollar (UUP), even though the markets slightly exceeded our initial sell targets at 10,050 on the Dow and 2,180 on the Nasdaq at first. The markets were becoming very overbought at that point.

The more the markets continue to edge upward, the greater the returns from being short the market with lower downside risks. However, it will take a flexible strategy both to ensure that you don’t miss the next great crash and to ensure that you also don’t suffer great losses waiting for it.  The key indicator at this point is how far the markets correct into early to mid-November; such a correction is due and has started to set in.

If we don’t break 9,200 conclusively, then the markets are likely to keep edging upward into early to mid-December and/or as late as February. A break of 9,100 would be even more conclusive. In that case we would advise covering your shorts on the S&P 500 (SH) and selling your long positions on the U.S. dollar (UUP), and then re-establishing these again as late as February 2010. Aggressive investors may want to re-buy stocks at that point as well with a potential 20% plus rise from near 9,200 to as high as 11,300. Our trends into late 2010 remain the same: stocks and ultimately commodities falling—and the dollar and interest rates up—which means that bonds will fall in value and most foreign currencies will tend to fall as well.

Our analysis of the housing and banking crises that are most critical strongly suggest that both continued high unemployment on a lag to the recovery and rising real estate defaults on an even greater bureaucratic lag are likely to
continue to trigger the next banking and economic crisis by the summer of 2010.  Rising adverse geopolitical events on our cycle are likely to kick in as well between late 2009 and mid-2010, as we have been warning. We will look in this issue at how 48% of mortgages are likely to be underwater by early 2011, according to a very good study by Deutsche Bank. That study does not take into account our more bearish view of the economy between mid-2010 and mid- to late 2012!

We predicted this bearish turn in late 2008, noting that the next “Great Depression” would finally occur beyond the first major recession in 2008 and 2009. It was obvious to us that the government would stimulate strongly into this first major crisis and downturn, with an initial rebound to follow. That rebound has continued a bit beyond our expectations, as we expected this bear market rally to peak by early to mid-September. However, such recent strength in the strongest annual downward cycle or “tax-selling season” suggests potential further strength ahead at first. So, we have to continue to reevaluate this bear market rally and play it strategically."

 

October 23, 2009

Special Report

Economist Forecast Update for US of A

"Two things happened today that suggest we will see a correction near term as we have been expecting. First, the markets reversed down after very good earnings news late yesterday. Second, the Dow Transports did not make a new high recently and is reversing down faster. This correction will be critical as it is possible we could see a sharper crash ahead if the markets have topped. But if we don't break clearly below 9,200 by mid-November or so, then we could see the markets continue to edge up as late as December or February. We will comment more in the November newsletter, but it continues to make sense to hold short positions against the S&P 500 (SH) and long positions on the U.S. dollar (UUP), and likely for a few weeks at a minimum."

September 1, 2009

Special Report

Economist Forecast Update for US of A

"We have been looking for a peak in this bear market rally, most likely between 9,100 and 9,800 between late July and early  September. The markets have continued to edge up but look they may finally have run out of steam with the larger correction in China. At best, the markets could continue to edge up to as high as 9,800 – 9,940 in early to mid September, but it is more likely we just saw a top on 8/28 at 9,630 on the Dow. The strongest resistance is just above that at 9,650 and 9,800 where the sharp rebound in late 2008 peaked. On 8/28 we gave a sell signal if the Dow broke 9,430 which it came close to on 8/31. We have been advising more aggressive investors that they can continue to play the potential upside if they have sell stops at 9,430. Now the rubber will hit the road and the markets should finally break down more convincingly or see one final surge. This period will truly go down as “paradoxical” in financial history as the leading indicators could not be more bullish and they haven’t failed since 1933. But we haven’t been in a major deflationary period since 1930 – 1933. Credit, spending, inflation and money supply normally move together – as would leading indicators that key off of money supply. But this time contracting money velocity and private credit deleveraging are creating a totally different environment – a once in a lifetime environment that we have been warning about for years. A unique deflationary environment between late 2009 and 2012 will create very different trends:

1. Consumers and businesses will not come back and follow government stimulus and spending as debt is saturated and banks are mortally wounded despite recent profits and loan paybacks.

2. Private credit deleveraging is the biggest trend and it will not stop. It has only slowed at best. It will and always comes back and accelerates again despite government stimulus which cannot solve the primary problem of excessive debt ratios and burdens, especially in a declining demographic spending era with rising savings ahead. Economists are wrong about the government preventing the next great depression. Their near uniform proclamation that the recession is over is very bearish.

3. Stocks will start to anticipate the next banking crisis that is already emerging with continued deleveraging and defaults even in an improving economy with another crash beginning in September and October and a likely crescendo at
first into November.

4. Stocks trends will continue down on our most important cycles into at least August of 2010 and more likely October. Real estate will start to fall again by late fall after a brief reprieve.

5. The US dollar will not only not crash in this crisis, it will rise as our trade deficit falls further, and as deleveraging of assets and credit creates fewer dollars on the world stage and increases their value. The dollar has already crashed 58% from its long term peak in 1985 and 40% from its bear market rally peak in 2001.

6. Due to signs of slowing ahead and a rising dollar, most commodities have likely seen their recovery rally similar to stocks as we have been warning. The “crisis” commodities liked gold, silver, oil and natural gas may still have another run
ahead into late 2009 or early 2010 as the crisis resumes.

Two trends drove our economy in the last boom from 2003 into 2007: Accelerating private credit expansion and the spending of the richest 1% to 10% of households.  The top 10% paid 71% of federal taxes and created 48% of the income. Now they are hurting for the first time and defaulting faster than the average household. Even trillions in stimulus cannot stop this massive demographic and deleveraging shift. It will very likely come back stronger than ever by November."

August 11, 2009

Tax Specialist Alert

Tuition Recovery and Education Credits

"In an effort to retain graduates, provinces have recently begun to reimburse tuition paid to post-secondary graduates if they remain in the province. Manitoba and Saskatchewan will reimburse 100% of the tuition paid if the graduate remains in the province long enough. New Brunswick will reimburse 50%. This reimbursement is in addition to the credits allowed to students in the year that the tuition is paid (or in a later year if carried forward). For students who continue to live and work in the same province after graduation, the result is a reimbursement of more than the amount of tuition paid (in Manitoba and Saskatchewan).

Many frenzied parents find the "back to school" rush a financial burden. Besides clothing, school supplies, transit passes and books, there is tuition for university students, a rising cost across the country. Now is the time to consider the monthly credits earned by post-secondary students, which will turn into cash at tax time for students or their supporting parents, grandparents or spouses. No receipts are necessary to benefit from this lucrative credit, but Form T2202A must be received from the university or designated educational institute.

Families should check the points below for a better understanding of qualifying criteria.

EDUCATION AMOUNT

Full Time Students. The credit for full-time students is $400 per month. A full-time education amount may be claimed for each whole or part month in the year that the student was enrolled in a qualifying educational program at a designated educational institution and the student:

• was enrolled full time,
• was enrolled part time and qualified for the disability amount, or
• was enrolled part time because of a mental or physical impairment.

Qualifying educational programs (FULL-TIME): a program that lasts at least 3 consecutive weeks and requires a minimum of 10 hours of instruction or work in the program each week (not including study time). Instruction or work includes lectures, practical training, and laboratory work. It also includes research time spent on a post-graduate thesis.

After 2003, a program taken by the student in connection with the student's employment duties, even if that student receives income from that employment, will qualify provided only that the employer does not reimburse the tuition cost. Prior to 2004, the opposite was the case: such programs did not qualify, whether the employer reimbursed the student or not.

Non-qualifying educational programs: Students who receive, from a person with whom he or she deals at arm's length, a grant, reimbursement, benefit, or allowance for that program do not qualify.

However, receipt of a scholarship, fellowship, bursary, or prize received, or any benefit received under the Canada Student Loans Act, Canada Student Financial Assistance Act, or the Act respecting financial assistance for education expenses of the Province of Quebec does not disqualify the education program.

Part Time Students. The credit is $120 per month. These may be claimed for each whole or part month in the year that the student was enrolled in a specified educational program at a designated educational institution. A specified educational program is a program that lasts at least 3 consecutive weeks and requires at least 12 hours of instruction each month."

July 1, 2009

Special Report

Economist Forecast Update for US of A

"The Leading Economic Indicators are flashing recovery now, having marched back up near the even or zero line, but there is still plenty of reason for caution as we question whether or not measures like this are meaningful in our new economic season. With capacity utilization so low, debt levels still high, and unemployment marching higher, it is hard to see a meaningful long-term recovery no matter what type of stimulus plan is in place.

We see a move higher here, but it should be short-lived. That makes an allocation for the quarter very difficult. As always, please keep in mind these are just models. Each investor must review their own situation and make their own investment decisions. Also, as we continue through this very difficult economy for what could be the next 5-7 years, investors must be willing to move quickly. The goal is not to “buy for the long-term”, but instead to capture momentum when it shows up. This requires investing in trends and having clear sell strategies such as stop loss orders."

For the 3rd quarter of 2009, our portfolio models are:

Aggressive:
15 Emerging Markets
20 Financials
15 China
15 Asia (ex-Japan)
10 Energy
15 Small Caps
10 Technology

Moderate:
10 Emerging Markets
10 Financials
10 China
10 Energy
10 Small Cap
25 Large Cap
15 Bonds – TIPs
10 Technology

June 1, 2009

Special Report

Economist Forecast Update for US of A

"We saw a minor correction in stocks in May 2009. However, the markets continue to hold up well, giving little on corrections. The most likely scenario is a breakout of the sideways correction in the 8,200 to 8,600 range, with a final break toward 9,800 to 10,340 around July. Alternatively, the market could break below 8,200 and retest 7,800 near term and rally more toward
9,100 to 10,000. The dollar also is likely to move upward temporarily near term after an extended sell-off, likely from further signs of economic slowing. Hence, at least a small correction in commodities, including gold and oil, is likely as well before a continued rally into late 2009 or possibly early 2010. Stocks are likely to give a second buy signal before commodities if the dollar rises in the weeks ahead. Thus, these near-term trends are likely:

(1) an increase in the dollar,
(2) a minor decrease in stocks,
(3) a decrease in bond yields,
(4) a decrease in commodities, including oil and gold
(5) a decrease in the euro and safe currencies, and
(6) a decrease in gold and silver.

The strong V-shaped advance, which gives little on corrections, actually is more characteristic of bear market rallies. Traders suddenly have become nearly as bullish as they were at the top of the market in October 2007. This trend shows too much “hope” given the massive blows that the U.S. financial systems have taken.  There are also many short positions from traders that doubted the rally that continue to unwind and add fuel to the bullish trends. The strength of this rally strongly suggests not only that another advance will occur into around July, but also that this rally is not sustainable. Broad, new bull markets tend to rise in stair-step patterns with clear consolidations between each step. For example, the last bull market rally began in early October 2002 and continued strongly into January 2003. However, a near-retest of the lows occurred into March 2003. After that, the market rallied strongly into January 2004 with an 8-month consolidation into October 2004, and so on.

We continue to advise investors to hold stocks until around July. At that point, investors should sell and either reinvest in gold, silver, and commodities or move to T-bills and/or safe currencies until long-term bonds and stocks look attractive again, which may be well into 2010. Our decennial and 4-year cycles both turn downward from around September 2009 into late 2010. Our intermediate-term geopolitical cycle suggests another surge in terrorism and war between late 2009 and early 2010 – that can’t be good! The 10-year Treasury yields are moving rapidly toward our first target of 4.6% to 4.8%, which ultimately will impact mortgage and corporate borrowing rates. The government has made efforts to buy Treasury and Agency securities to keep mortgage rates low. However, the government has not been able to keep Treasury rates down, which is a sign that the government is vulnerable to the pressures from its own rising debt obligations. Our 29- to 30-Year
Commodity Cycle peaks between late 2009 and early 2010 (although highs already have been put in) and then turns downward for many years. Our longer-term demographic and technology cycles point downward for a decade or more.
The biggest reason that the recovery will be aborted at some point is that we have begun a deleveraging process that is overwhelming, given that U.S. total debt is now over $52 trillion (371% of GDP as of 12/31/08 or now 381% as of 4/30/09). The subprime crisis was the first to hit the banks hard. Now, prime loan defaults are approaching those of subprime loans. Ultimately, defaults on prime loans will be much higher than defaults on subprime loans have been, because many
people bought homes at greatly inflated rates between 2003 and 2007.  More homes will be worth less than the mortgages on them and more households will either demand that the mortgages be restructured or simply walk away from their home, especially if they become unemployed. Commercial real estate failures, credit card defaults, and business bankruptcies all will increase over time as unemployment rises towards 15% in early to mid 2011 or so."

May 7, 2009

Special Report II

Economist Forecast Update for US of A

"The substantial bear market bounce we anticipated is clearly now underway and the rise has been very strong and steady. We could see a modest setback into late May or so, but we are then likely to see a second strong rally before the market peaks and begins to turn down again. We have refined our best forecast for the Dow to 9,650 - 10,400 around mid- to late July or so. The best target would be around 10,100 in late July.

We are also finally starting to see leading indicators suggest that the economy will see some type of rebound later this year. What is likely to cause stocks to turn down again despite a rebound? First would be that commercial real estate continues to fall with rising unemployment that is likely to continue well into this year and that will continue to hurt the banks just as residential real estate flattens or rebounds a bit in some areas. Treasury bond rates bottomed at 2% in December of 2008 and yields are rising despite the government's efforts to buy its bonds and keep rates down. Recovery anticipation, some rise in inflation pressures and rising concerns over the U.S. government's credit quality will likely cause T-bond rates to rise towards 4.5% plus in 2010 and possibly a good bit higher. This will cause mortgage rates to rise just as real estate is hoping to recover and hurt the banks again. Then there will be a broader "prime" crisis wherein ordinary households have mortgages greater than their ho me values and then there will be the credit card crisis, and so on. The banking system is too mortally wounded to return to health and baby boomers are rapidly converting to savers as they would naturally in their 50s, but falling retirement assets make savings rather than spending even more urgent. Hence, the stimulus plan won't continue to be effective after a point.

We still expect stocks to start falling again by the fall and wouldn't want to stay in stocks past late July, or August at the latest, especially given that our 4-year and Decennial cycles start to turn down again making late 2009 to late 2010 the most dangerous period yet ahead. September and October tend to be the worst months for stocks."

May 1, 2009

Special Report

Economist Forecast Update for US of A

Solid Rally Increasingly Overbought—Modest Corrections in May Followed by Continued Rally Toward 10,000 into  July/August

"In brief: The stock rally since March 9, 2009, has been consistently strong, giving up very little on corrections.  We saw a follow through rally on March 12 and generally rising volume throughout. Hence, this long expected rally looks as if it has legs, as we have been commenting. However, stocks have become extremely overbought near term and have bumped up against strong resistance between 8,100 and 8,300, as we forecast in the last issue. The Nasdaq is also testing its 200-day moving average as of 4/30. Thus, it is very likely that stocks will undergo at least a minor setback into late May or early June on a natural seasonal cycle. The question is whether we will get a shallow correction with targets between 7,460 and 7,800 or a deeper correction back to at least 7,240 and possibly much lower. Two reverse head-and-shoulder patterns both point toward a target of 10,100 to 10,200 but with very different correction patterns and downside targets. The shallower correction is the more likely scenario at this point given the market’s consistent strength. We have been warning of this impending correction and gave a sell signal at 8,150 on the Dow for shorter-term traders, which was triggered on the morning of April
29. We will be looking for a buy signal again around late May or early June. It is also possible that the market could just continue to edge up despite its very overbought readings. In that case we won’t be able to generate a second buy signal for adding to stocks.

Bearish economists tend to see risks of deflation this year but greater risks of inflation in the years ahead. We continue to see deflation as the clear threat, and it is likely to set in more fully by mid- to late next year after a brief dose near the midpoint of this year. We see inflationary trends and rising commodity prices again more in the 2020s and 2030s – very long term – and due to demographic and commodity cycles, not money printing. Not only do financial institutions and corporations have problems with excessive debt and leverage, consumers are $14 trillion in debt and
need to get back into balance, given falling retirement assets and slowing economic and job growth. The government instead wants consumers to borrow and spend, which is the opposite of the natural demographic trends and their new reality, in which retirement assets are disappearing rapidly. The deleveraging of debt will destroy more loans and assets than the government will create with its stimulus plan, as we have been saying in recent issues.

We are just beginning another level of international research that we will cover more in the quarterly July issue. Emerging countries are clearly the future of world growth as the western nations, Japan and most of East Asia age and slow. The big question is: How rich will these emerging countries get? And the answer typically is—not as rich as you might think! We will start to look in this issue at how emerging countries develop on an S-curve of urbanization. There typically exists
a clear relationship between GDP per capita and urbanization that allows us to project the future wealth and growth of economies decades into the future. Brazil is already 80% urban, similar to the U.S., yet their GDP per capita is only $6,000, 20% of ours. China may attain a GDP per capita of only $9,000 in today’s dollars vs. $30,000+ in the U.S. They may not quite attain even that level, given a prematurely aging population due to their government’s one-child policies, which have been in place since the early 1970s."

April 6, 2009

 “O Canada” by Jay Llave

Which country will weather this housing deflation the best?

              The greatest standard of living have emerged not in Europe since the early 1800's, but in what we many times call the "Western offshoot" countries; the U.S., Canada, Australia, and New Zealand.  As a Canadian, my thoughts leads to the question, “Will Canada suffer the same real estate deflation as the U.S.?” 

              Canada has similar demographic trends as the U.S. (Ill. 1), high immigration rates, has a sounder banking system, but different than the U.S. in which Canada has higher exports in commodities and resource industries.

 

Illustration 1

              Canada’s weakness is the higher export exposure (Ill. 2), which tends to be focused in commodities and resource industries.  The peaking of the Commodity cycle may hit Canada much harder than the U.S. and resulting in Canada feeling the global and commodity downturn the hardest. Illustration 4 shows Canada’s exports declining 34% in the last year, the U.S. is down 21% (Ill. 3).

Exports as Percentage of GDP
Germany	48.2%
Canada	34.5%
South Korea	31.4%
Italy	27.9%
France	26.3%
New Zealand	24.3%
United Kingdom	20.8%
Australia	18.4%
China	17.2%
Japan	15.9%
India	5.1%
United States	8.3%
Source: CIA World Factbook

Illustration 2

Illustration 3

              The banking soundness of Canada makes it less prone to an extreme banking meltdown and counter currencies for hedging against the falling of the U.S. dollar in the immediate future.

Soundness of Banks by Ranking
Canada	1
Sweden	2
Luxemburg	3
Australia	4
Denmark	5
Netherlands	6
Belgium	7
New Zealand	8
Ireland	9
Malta	10
United States	40
United Kingdom	44
Source: World Economic Forum 2008 Report

Illustration 4

              Canada has only 3 in the top 25 and top 50 of least affordable housing markets (Ill. 5).  Canada has the smallest real estate bubble and lower levels of overvaluation.  Illustration 6 breaks down each country into levels of overvaluation compared with income from best to worse.  Canada only has 4 of 29 severely and 3 of 29 seriously overvalued, with a median overvaluation of only 3.1 (Ill. 7).

Top 50 Least Affordable Housing Markets
USA - Los Angeles	1
USA - Salinas	2
USA - San Francisco	3
USA - Honolulu	4
USA - San Diego	5
USA - San Jose	7
Australia - Sunshine Coast	8
Australia - Sydney	11
Canada - Kelowna	13
Canada - Vancouver	16
Australia - Perth	19
Canada - Victoria	22
Source: 2008 Demographia International Housing Affordability Survey

Illustration 5

Illustration 6

 

Affordable Markets by Country
Nation	Affordable	Moderately Unaffordable	Seriously Unaffordable	Severely Unaffordable	Total	Median
Australia	0	0	3	25	28	6.3
Canada	13	9	3	4	29	3.1
Ireland	0	1	4	1	6	4.7
New Zealand	0	0	0	7	7	6.3
United Kingdom	0	0	3	25	28	5.5
United States	46	30	23	30	129	3.6
Total	59	40	36	92	227	4.5
Source: 2008 Demographia International Housing Affordability Survey

Illustration 7

             

              In summary, I am leaning more towards that Canada, other than the West Coast, will be able to weather the housing and banking crisis the best and a good place to invest in real estate.  Lower overevaluations, sounder banking system, less income leveraged, although an unbalanced GDP, are strong grounds for our success.

News Update

January 2, 2010

By subscription only

Economist Forecast Update for US of A

Monday, December 21, 2009

"The most interesting development over the last two weeks has been the rally in the U.S. dollar. The odds are growing that a bottom has been put in, but it is not conclusive yet. The dollar rallied 5% from late March into late April, then resumed its downtrend. But this 5% rally has occurred on much higher volume and that is a good sign. The trader sentiment on the dollar has risen from 3% at the lowest to 58% recently, that is a good sign. The only question mark comes from low volume around the bottom as it would have been nicer to see a stronger capitulation. The dollar has resistance just above here at around 78.20. If it can break above that, it will represent greater confirmation. If the dollar has bottomed, then we have likely seen a top in gold and stocks should also top relatively soon, but there are not clear signs of that yet.

Stocks have had a hard time breaking the 10,500 - 10,550 resistance area and do not appear to have the strength to break up substantially from here at this time. The strongest market has been the Nasdaq, which made a new high this morning. The technical indicators in stocks show high bullish sentiment and increasingly selective buying of larger cap stocks. That is normally bearish. But our Lowrys service does not show any rise in selling pressure, and until that happens the markets are likely to continue to edge up. Markets will not go down until the smart money starts to sell into it, and that has clearly not begun to occur yet. Our oscillators are also still not bullish enough short term to suggest a top. We may even get a second short term buying opportunity in the 10,170 - 10,230 range for the Dow and 1080 - 1085 on the S&P 500 ahead.

The SPY (long S&P 500) and the QQQQ (Nasdaq 100) look to be the best places to buy. We will continue to monitor the dollar for a breakout above 78.20 or a pullback for a better buy opportunity to somewhere near 76.00. At this point we will only switch to being bearish on stocks if they get more clearly overbought or if we see a clear break below 9,960 (Dow) or so.

It is increasingly likely that gold has topped, and possibly oil as well, unless we see a geopolitical-generated spike in the months ahead that could be too hard to predict at this time. Investors holding gold and oil may want to sell into the next rally back towards $1150 plus on gold if it occurs. Trader sentiment has swung from 97% bullish to 42% bullish on gold. If sentiment gets very bearish on gold or oil, then they could be worth buying again for hedging against short term geopolitical risks."

 

Tax Specialist Alert

Wednesday, November 4, 2009

"In the past few years, governments have been moving towards family income splitting in very limited circumstances. For example, in 2007 it became possible for those who receive certain pension benefits to transfer up to 50% of that income to a spouse if that is to their tax advantage. This will usually provide for tax savings as pensioners take advantage of the progressivity of tax brackets and rates.

It is also possible for business owners to split the revenues they earn by hiring their spouse or children in the business, if they otherwise would have hired a stranger to perform the role. The family member must be qualified to perform the role and actually do so, for reasonable compensation similar to what would be paid to a stranger. In this case, the amounts paid are deductible to the business owner and taxable in the hands of the family member.

This is great tax planning, as it opens up tax advantaged investment opportunities for the family members by creating “room” for contributions to Registered Retirement Savings Plans (RRSP) and in the case of adults, contributions to the Canada Pension Plan (CPP), and Tax-Free Savings Account (TFSA).

Certain employed commission sales agents may also split income by hiring a family member as an assistant, however the fact that this ­assistance is required and paid for by the agent must be a condition of their contract of employment.

When it comes to splitting investment income the rules are more ­complicated, as described below. Passive income from investments is reported each calendar year and, with the exception of rental income, will not create RRSP contribution room. The primary categories of investment income are:

• Interest: this income is reported in full in the year received, or in the case of compounding investments, in the year accrued.

• Dividends from Canadian Corporations: Paid out after-tax profits of a corporation, the actual amounts received are “grossed up” on the tax return, thereby increasing a taxpayer's net income. You'll see this on your T-slip as the “taxable” amount. This gross-up can have an effect on the size of refundable or non-refundable tax credits. However, the dividend is offset by a dividend tax credit which reduces federal taxes and, in the end, gives most investors better tax results than interest earnings. Dividends from Canadian Controlled Private Corporations are subject to different gross-up and dividend tax credit rates from those of public corporations, because of the way the corporations are taxed. This system ­integrates the personal and corporate tax systems in an attempt to avoid double taxation.

• Rents: This income is reported on a “net profit basis” and is ­generally nil, as many taxpayers like to reduce their rental income by claiming a deduction called Capital Cost Allowance based on the value of their building. This may however cause a tax problem in the future, if buildings appreciate over time.

• Royalties: This income is reported in full, but certain resource properties may be subject to more advantageous tax treatment.

It is important to understand how you might earn these types of income from your investments. If you are still unclear about these terms speak to your advisors so that you can match investment products to income sources.

Notice that capital gains earned on the sale of income producing assets, such as publicly traded shares or a rental property, are not included in this list of investment income sources. A capital gain occurs when an income producing asset is sold for more than its “adjusted cost base”. That's your original acquisition value or price plus certain additions or deductions. Only one half of any capital gains are taxable, after you reduce them by any capital losses incurred during the year. This source is in a category by itself."

 

Tax Specialist Alert

Friday, October 16, 2009

" Today, the Department of Finance moved to close several loopholes for TFSA investors including the prohibition of swap transactions between various investment accounts and the earning of income from prohibited and non-qualifying investments. The new rules, which will come into effect after October 16, 2009, contain four main components:

• Shifts in Value in Swap Transactions. Asset transfer or “swap” transactions between registered or non-registered accounts and Tax Free Savings Accounts, will no longer be possible after this date. That is, transfers between accounts of the same taxpayer or that of the taxpayer and an individual with whom the taxpayer does not deal at arm's length will be prohibited. This will squash any shift value from, for example, an RRSP to a TFSA without paying tax, first.
  
• Income from Intentional Overcontribution. Income earned within a TFSA due to an intentional overcontribution will be subject to a tax of 100%. Should a taxpayer have made an overcontribution in error, prompt rectification is required to avoid the penalty; such actions will be seen positively by the Minister, who will have the discretion to waive interest and penalties in those cases.
  
• Income from Investment in Non-qualifying and Prohibited Investments. In addition, should the taxpayer invest in non-qualifying investments (land and general partnership units, for example) or prohibited investments ( such as shares of the capital stock of a corporation in which the holder has a significant (10% or greater) interest and investments in entities with which the holder does not deal at arm's length), any income reasonably attributable to those prohibited investments will be considered an "advantage" and taxed at 100%.
  
• No New TFSA Room. The proposed amendments will also include rules to ensure that the withdrawal of amounts in respect of deliberate overcontributions, prohibited investments, non-qualified investments, asset transfer transactions and income related to those amounts do not constitute distributions for TFSA purposes and therefore will not create additional TFSA contribution room.
  

A brief review of TFSA Planning Rules:

1. What is a TFSA?
Available January 1, 2009, the new Tax-Free Savings Account (TFSA) is a registered account in which investment earning, including capital gains accumulate tax free. Contributions up to an annual maximum of $5000 can be made by/for those who have attained 18 years of age and are residents of Canada. There is no maximum age limit. This amount will be indexed after 2009, with rounding to the nearest $500.

2. Can unused contribution room be carried forward to future years?
Unused contribution room can be carried forward on an indefinite carry forward basis. You can take money out, in other words, spend it on whatever you want, and then put it back in when you can because the TFSA contribution room has been preserved.

3. What happens when I make an overcontribution?
Taxpayers cannot contribute more than their available TFSA contribution room in a given year, even if they make withdrawals from the account during the year. If they do, a penalty tax of 1% of the highest excess amount in the month, for each month you are in an overcontribution position is charged. Discrepancies in contribution room limit or excess contributions, must be reported to the TFSA issuer.
In addition, after October 16, any income earned resulting from an overcontribution, or a contribution to a prohibited or non-qualifying investment will be taxed at 100%.

4. What income sources should be earned from the TFSA account?
That largely depends on age and sources of other income. Those sources of income subject to the marginal highest tax rates (such as interest) or dividends, which artificially inflate net income, thereby decreasing social benefits payments, should perhaps be earned within a TFSA. But if you are looking for real growth, the TFSA should contain a diversified set of investments, including equities.
Note that losses from investments earned within a TFSA are not deductible from capital gains held outside the account.

5. What are eligible investments for a TFSA?
The same eligible investments as allowed within an RRSP apply to the TFSA. A special rule will prohibit a TFSA from making an investment in any entity with which the account holder does not deal at arm's length.
Unlike the RRSP, contributions to a TSFA do not result in an income tax deduction and withdrawals from a TFSA are not reported as income nor included in income for any income-tested benefits, such as the Canada Child Tax Benefit or Goods and Services Tax Credit.

6. Do the Attribution Rules affect investments within the TFSA?
There is no attribution rule attached to the new TFSA, allowing adults, including parents and grandparents to transfer $5000 per year to each adult child in the family—for the rest of their lives. In addition, one spouse may transfer property to the TFSA of the other spouse without incurring attribution.

7. Can the TFSA be used for retirement planning?
Yes. A 40 year old taxpayer who invests $5,000 each year for 25 years in a TFSA (total capital of $125,000) at a 3% rate of return, would accumulate $185,000 in the account, an increase of $60,000 or 48%. This would be approximately $15,000 more than if the same investment was made outside the TFSA in a taxable account."

 

Tax Specialist Alert

Wednesday, September 2, 2009

Choose Charity carefully

"The CRA has announced that they have revoked the charitable registration of a Toronto based charity, The Mission Against Poverty Shelter. The charity allegedly issued receipts for transactions that didn't qualify as gifts, and failed to maintain proper records to support its activities.

With tax freedom day finally behind us, many Canadians start working for themselves and their communities in the summer months. But be aware of where you are donating your time and money, as numerous charities have had their charitable status revoked in the last year due to non-compliance with the rules for maintenance of their registration.

Last year the CRA revoked the status of 38 charitable organizations, after auditing 845 charities, for serious infractions and this trend is continuing in 2009. Many other charities lost their status after failing to file their annual returns. Once an organization has their charitable status revoked it can no longer issue official tax receipts for donations and it is no longer a qualified donee under the Income Tax Act.

Some reasons that CRA will revoke a charity's status include the following:

1. lack of control over spending of charitable funds
2. poorly maintained books and records
3. issuance of tax receipts in excess of gifts received
4. failure to meet charitable activity spending requirements

Following is an excerpt from the Tax Efficient Retirement Income Planning Course, providing some insight on the giving qualities of Canadians as a whole:

Facts on Canadian Philanthropy

• 5.7 million Canadians contributed $6.9 billion to charitable organizations in 2006
• Statistics Canada reported that the total market value of stock held by Canadians at the end of 2006 was $1.4 trillion, an increase of $100 billion over the previous year
• Approximately one-half of that market value represents unrealized capital gains, suggesting that the opportunity for many shareholders to donate stock and save tax is very significant
• TD Economics estimates that the market value of stock held by Canadians in 10 years' time could exceed $3 trillion, with as much as two-thirds of that in unrealized gains
  

Demographic Trends

• Potential for philanthropy is immense: In Canada, between $15 and $20 trillion is expected to shift from parents to their children between now and the middle of the century
• Baby boom generation is having significant impact on the world of charitable giving: not content to simply write a cheque and move on, donors expect transparency and accountability - they want to be involved
• Many charities are revisiting the way they operate in order to attract these younger philanthropists
  

General Rules

At some point during the year many Canadians give to charities. Those gifts, usually of money, will be claimed on Schedule 9 of the tax return. Unclaimed donations from the previous five years may also be claimed in the current year. Donations made through payroll deductions should also be claimed. These will show on the T4 slip. Generally you can claim all or part of your total donations, up to a limit of 75 percent of your net income reported on line 236. For the year a person dies and the year immediately prior, this limit is 100 percent of the person's net income.

It is generally most beneficial to claim donations made by both spouses together on one tax return. This is because the first $200 of donations is eligible for only a 15 percent tax credit, while any additional donations attract a tax credit of 29 percent. Combining donations will ensure the couple is subjected to the 15 percent limit on the first $200 only once, not twice.

Donations made during the year do not have to be claimed on that year's return and may be carried forward to a subsequent year, up to five years. This may be of benefit, if, for example, you already have sufficient non-refundable tax credits to completely eliminate taxes payable.

So remember, only donations made to Canadian registered charities and other qualified donees may be claimed. A registered charity will show its charity registration number on the receipt. The slip must also indicate the Web address of the CRA."

Economist Forecast Update for US of A

Tuesday, August 4, 2009

"We are hitting some important extremes in our futures trader sentiment. The S&P 500 just hit its sentiment highs of October 2007 at 89% and could go as high as 92-94%, and the NYSE 21-day oscillator has hit a level of 300 on the overbought side. This is signaling that we are getting very close to at least a short term high. This makes buying here more risky and raises the odds we could see a top currently or in days rather than as late as early September. If the market is going to move higher it needs to take at least a little break here first.

The U.S. dollar has hit a new low in bullish of a mere 2% as it broke below strong support at 78 yesterday. This would strongly suggest that we are at or near an intermediate low in the dollar and that would not bode well for further commodity advances near term. The commodity sentiment is not as overvalued which suggests we could see a rally there later in the year. We would suggest holding off on buying stocks and do have a 5% trailing stop as we advised if you do. It would also continue to make sense to lighten up on oil, gold and silver and wait for a better buying opportunity later. Natural gas has been very volatile as has been typical, but could have finally made a bottom. But still likely better to hold off and see how it performs if the dollar rises for awhile."

Economist Forecast Update for US of A

Monday, August 3, 2009

"The markets are acting very irrationally, which you would actually expect at such a major turning point ahead in the economy. Most expect a rebound and a new bull market, but the smarter institutional investors are still skeptical, as are we. Every measure we have still strongly suggests that this is a bear market rally, including the strong upward momentum that just won't take a break once it gets going. That is a sign of short covering, not new institutional buying, as is the very low volume of this rally. Traders are driving this market up, not real investors. But the problem with technical indicators at extreme times is that they can stay overbought or oversold longer than usual.

So, the real question becomes: Is this rally worth chasing short term or not? We do not see this rally lasting past around September 4th - 7th. The reverse head-and-shoulders pattern on the S&P 500 argues that there could be a strong panic as people buy back in, which would produce major gains. But the overbought levels on our technical indicators and the fact that the markets break through strong resistance levels and then just stall rather than "running up" suggests that this rally is getting tired. If the reverse head-and-shoulders pattern were real, then the markets should break up strongly near term, and thus far they haven't. The truth is that this rally could stall and reverse at any time between now and early September, but there is no perfect way to time that given the extreme state of the technical indicators.

More aggressive and flexible investors can buy on any pullbacks now that the market has held up into early August without violating the breakout levels of 958 on the S&P 500. But you have to be flexible enough to pull back on short notice if the markets start to fail or continue to run up into our later dates around early September. The upside here is likely to be more like 5% to 10% to 9,800 - 10,340, and possibly 20% or so with the reverse head-and-shoulders pattern. The downside over the next year is 60% plus, but more realistically 30% by year end if the markets break sharply down from here or from slightly higher levels.

To reiterate - this is a buy signal, on pullbacks, for those who are quick enough and flexible enough to be able to get out quickly if and when the market turns down. With possible gains limited to 10%, 20% max, and the downside at least 30%, the market is very risky! These are not odds that you would accept at any casino where the house has a 2-to-1 or 3-to-1 chance of beating you!

The best areas to buy would be the sectors that have led this rally, such as China (FXI), emerging markets (EEM) and technology (QQQQ). (We use these specific tickers for illustrative purposes only).

And just to add to our August newsletter, there is more recent evidence for rising loan defaults later this year. There is a sharp rise ahead in the number of people who will exhaust their unemployment benefits which would add even more to consumer loan defaults than slower rises ahead in new jobless claims. The numbers accelerate the most in September to almost 500,000 and then even more in December to almost 1.5 million. The government will of course respond in some way to this, but further pressures on the banking system will cause a loss of confidence in the stock markets and among consumers and very likely lead us into the next banking crisis just as the economy is supposed to recover late this year and early next year. Even Bernanke and Geithner forecast that unemployment will not peak until early 2010. This expiration of past claims could be the key accelerator for the next banking crisis."

 

Economist Forecast Update for US of A

Thursday, July 30, 2009

"The markets have moved in a very narrow range sideways for days. They continue to break to slight new highs above resistance at 9,100 and then pull back again. The Dow looks like it may open up just above the last high at 9,125 this morning. At this point the markets are so overbought that we wouldn't recommend chasing this rally yet. We were allowing that we could go to 9,100 - 9,250 and then peak.

We finally saw a major drop of 7% in China on 7/28 and oil and commodities have started to back off with the U.S. dollar rallying a bit as we warned. There is still a chance that the markets are peaking here with stocks the last to fall. If the markets can continue to move sideways or edge up into early next week without breaking below 959 on the S&P 500, then we will be more likely to recommend re-investing for a final rally into early September or so. Otherwise, let's wait this one out for now and force the markets to play out their hands."

 

Economist Forecast Update for US of A

Wednesday, July 24, 2009

"It is possible we saw a top in the markets yesterday. The markets broke up above strong resistance at 958 - 960 on the S&P 500. However, they are too overbought to likely continue to move upwards. We may still have seen a top as we came close to testing our minimum target and resistance at 9,100 on the Dow and the markets are pulling back a bit this morning on disappointing earnings reports after the closing bell. If the markets break back down below the breakout point of 958 - 960 on the S&P 500, that would be the first sign of a further decline. A break below 945 or 8,800 on the Dow would raise the chances we have seen a short term and/or longer term top. Another indicator we follow, the cyclical Bradley model points to a decline from mid to late July into late September after correctly predicting the last lower top in early June. If that is to occur we should see stocks weakening again by Monday.

For now we will hold with our sell signal and advise if and when we think it is worth getting back in the markets. Investors that did not sell may want to consider selling if we break below 8,800 on the Dow as such a break would tend to invalidate the larger, more bullish reverse head-and-shoulders pattern."

Tax Specialist Alert

Thursday, July 9, 2009

Warning to all Investors

"Ontario's plan to harmonize its provincial sales tax with the GST could end up costing investors across Canada millions of dollars unless some kind of deal can be worked out.

The problem arises from the fact that the 5% GST is applied to certain financial services, including mutual fund management fees, while provincial sales tax is not. As a result, investors currently pay an additional 0.1% on a 2% management charge.

If the harmonized sales tax (HST) goes through as planned, the combined rate would be 13% which would increase the tax on a 2% management fee to 0.26%. The average management expense ratio (MER) on Canadian mutual funds is already one of the highest in the world. Such an increase would only add to the costs and would come directly out of investors' pockets in the form of reduced returns.

To complicate matters further, residents of other provinces also risk being hit by the increase even though it theoretically applies only in Ontario. That's because the majority of mutual fund companies are based in that province. It would be impossible for them to apply different tax standards elsewhere, raising the possibility that a Calgary resident buying an Ontario-based fund would be hit with a 13% tax on the management fee even though Alberta has no provincial sales tax.
This situation would also create a tax advantage for fund groups that are based outside Ontario, such as Investors Group which is headquartered in Winnipeg.

Although three Atlantic provinces (New Brunswick, Nova Scotia, Newfoundland and Labrador) moved to an HST several years ago, this issue did not arise because no major fund companies are based there. But the announcement in the March Ontario budget that the province plans to implement a blended sales tax on July 1, 2010 has changed the whole picture.
"The federal government should be concerned that people outside Ontario are not subject to a harmonized tax," says Barbara Amsden, director of research and strategy for the Investment Funds Institute of Canada (IFIC). She met with officials of the federal Finance Department in Ottawa on Monday to discuss the issue but said afterwards they "did not seem impressed" with the request for some kind of relief.

Applying the HST to management fees would amount to a "tax on savings" she says, noting that Canada is the only value-added tax country in the world with sales taxes at two levels.
The logical solution would simply be to exempt mutual fund management fees and similar financial charges from the GST/HST. But doing so would cost cash-strapped governments hundreds of millions of dollars. As of the end of May, member companies of IFIC had $537.8 billion worth of assets under management. If we assume an average management fee of 1.5%, that works out to slightly more than $8 billion that is currently subject to the 5% GST, generating about $400 million tax dollars for Ottawa. Amsden points out this is a huge windfall for the government as the fund industry has grown by almost 20 times since the GST was first introduced.

Ontario, which is also under the gun financially, would dearly love to grab a piece of that pie so their Finance mandarins are equally unlikely to be receptive to pleas for an exemption. If neither level of government is prepared to give ground, be prepared to lose a chunk of your mutual fund returns to the tax man. And you thought stock markets were the only risk in town!"

Economist Forecast Update

Wednesday, June 10, 2009

"The markets have moved sideways while Treasury bond yields have continued to edge up to near 4.0% rather than edging down. The dollar has rallied somewhat, but the strongest commodities like oil have also continued to edge up despite being very overbought. It will be difficult for oil and commodities to keep moving up if the dollar continues to rally. It is still likely that stocks will break up above 950 on the S&P 500 and continue to edge up given how little it has corrected thus far, but we will have to first see if the Dow can hold above 8,600 on the sell-off that started today. If it can't then we could see a more advantageous buy opportunity closer to 8,200 - 8,225. Hence, a buy signal will be triggered either at a break above 950 on the S&P 500 or a retest of 8,225 on the Dow."

Tax Specialist Alert

Wednesday, June 10, 2009

Cessation Of A Business and Tax Consequences

"There are corporate tax implications when a business is terminated and a corporation ceases to exist. Generally, a corporation ceases to exist on:

1. a winding up of the corporation pursuant to provisions outlined in subsections 88(1) or 88(2) of the Act;
2. amalgamation with another corporation under subsection 87(1) of the Act; and
3. Dissolution of its charter by filing Articles of Dissolution in the jurisdiction in which the corporation was incorporated.

There are differing tax consequences which will result to the corporation and its shareholders, depending on the manner in which the corporation is terminated.

For instance, there are generally tax deferral provisions available to a wholly owned subsidiary that is wound-up into its parent, pursuant to subsection 88(1) of the Act. Similarly tax deferrals are accorded for a statutory amalgamation under Subsection 87(1).

However, a winding-up under subsection 88(2) and distribution of the corporation's assets to its shareholders will generally result in the realization of the corporation's assets at fair market value (S. 88(2)(a)(iv)) and the taxation of such distribution to its shareholders as a dividend at fair market value.

Filing Implications - Business Cessation

On the Federal T2 return, if any of lines 072 (wind-up of subsidiary), 076 (amalgamation) and 078 (dissolution) apply, it is the corporation's final taxation year.

Example: Tax Planning

Consider and quantify the corporate tax impact of effecting a dissolution or termination of the corporation. Will there be corporate tax payable on resulting capital gains and recaptured capital cost allowance or the realization of reserves and deferred amounts?

Consider the utilization of losses to the successor corporation and the fact that an additional taxation year will occur on an amalgamation with another corporation.

Record Retention- The records of the dissolved corporation must also be kept for two years after the day the corporation is dissolved [Reg. 5800(1)(b)].

Clearance Certificates

The responsible representative of the corporation must obtain a clearance certificate from CRA pursuant to S. 159(2) before distributing any of the corporate property to avoid possible liability for the corporation's tax obligations. See Information Circular 82-6, Clearance Certificate, for more details.

Inactive Corporations

If the articles of the corporation are still legally in force, despite the corporation being inactive, the corporation must file a tax return.

Shareholder Implications

Evaluate that tax implications to the shareholders. If the shareholders are individuals they may be subject to tax on deemed dividend treatment on the wind-up of a corporation. If the shareholders are corporations consider the potential implications of Section 55 of the Act.

Provincial Laws

While each province has legislation for its own corporate tax laws, the federal government administers returns and collects taxes for most provinces and territories. However, Quebec, and Alberta administer their own corporate tax returns. To learn how this topic pertains to corporate taxation at the provincial level, refer to the applicable provincial legislation, guides and information circulars.

In Alberta, if it is the last return for the corporation, the reason for the final return must be listed (i.e. amalgamation, discontinuance of permanent establishment, bankruptcy, wind-up into parent, and dissolution of corporation). Quebec asks if the corporation has ceased activities at line 29 of Form CO17 and corporations in Ontario must obtain a Letter of Consent from the MCBS to voluntarily dissolve."

Tax Specialist Alert

June 3, 2009

"With the June 15 filing deadline approaching for proprietors, tax and financial advisors to farmers should note that realized farm income amounted to $3.3 billion in 2008, up $1.3 billion (+63.2%) from 2007, according to a Statistics Canada report released May 25. This was the second consecutive annual increase after declines in 2005 and 2006.

This could mean that for some, the taxes due on June 15 may be higher than last year. Should this happen, a variety of planning opportunities including averaging and capital cost allowance provisions may help. Clients should confer this week to optimize, and clients should be aware that interest will be charged from May 1st forward if there is a balance due on June 15.

In anticipation of the June 15th deadline, some of the common deductible items that can attract audit attention are:
   

• Home office expenses
• Auto expenses
• Interest costs
• Wages paid to family members
• Gross margins relating to purchases and inventory
• Personal consumption of tax deductible purchases.

We will review the allowable deductions available when completing a tax return with home office expenses.

Generally, deductions can include:

• supplies used up directly in the work (stationery, maps, etc.);
• salaries paid to an assistant (including spouses or children if Fair Market Value is actually paid for work actually   performed);
• office rent or certain home office expenses.
  

For the self-employed, deductible home workspace expenses include:

• utilities, maintenance and repairs including light bulbs and cleaning supplies;
• rent, insurance, property taxes, mortgage interest;
• Capital Cost Allowance (CCA) (although this is not recommended as the exempt status of the principal residence is then lost on the portion of the home on which CCA is claimed).
  

You may claim expenses related to the home office space. To qualify, the space must be the place where the individual principally (more than 50% of the time) performs the office or employment duties, or is used exclusively to earn income from the office or employment and, on a regular and continuous basis, for meeting customers or others in the ordinary course of performing the office or employment duties.

We help our clients arrange their affairs within the framework of the law and pay the least taxes possible!"

Tax Specialist Alert

Wednesday, May 27, 2009

"The new Home Renovation Tax Credit (HRTC) introduced in the 2009 Federal budget means that if you've been planning on renovating your home, this is a good year do it. For eligible home renovation expenditures made after January 27, 2009 and before February 1, 2010, families will be able to claim a 15% non-refundable tax credit for certain amounts paid to renovate their residence.

This non-refundable tax credit will be available for this period for families completing renovations to their personal residence, which may include a cottage as well as the taxpayer's principal residence. Eligible expenditures include the cost of labour, building materials, fixtures, equipment rental, and permits. The cost of financing the renovations will not be eligible. Renovation costs do not include regular repair expenses, costs of audio-visual equipment or items that have value independent of the home, such as furniture, draperies and construction equipment.

Some examples of eligible expenses are:
    Renovating bathroom, kitchen or basements
    New bathroom floors
    New carpets
    Building an addition, deck or retaining wall
    New furnace or hot water heater
    Interior or exterior painting
    Driveway resurfacing
    New sod

Ineligible expenses would include:
    Contracts regarding maintenance (i.e. snow removal, furnace cleaning, lawn care)
    Purchase of furniture and appliances

The credit will apply to the costs of renovations in excess of $1,000 to a maximum cost of $10,000. The maximum credit is thus $1,350 ($9,000 x 15%). The maximum credit applies to all renovations (renovations made to more than one residence may be pooled for claiming the credit). The credit will not be reduced by grants received through the ecoENERGY Retrofit program related to the renovation or by claiming the renovation expenses as a medical expense if they so qualify."

Tax Specialist Alert

Thursday, May 21, 2009

"In response to last week's Auditor General report that many corporations have been over paying their taxes as a form of short term investment, Revenue Minister Jean-Pierre Blackburn has advised that the government will find a way to close the loophole that allows the overpayments to collect interest.

As reported in the Globe & Mail and Business News Network (BNN), Auditor General Sheila Fraser announced that the Canada Revenue Agency had paid out a total of $90 million in interest – mostly to corporations that had overpaid their taxes.
Many of the 50 or so firms involved with the $4 billion in tax overpayments balked when CRA tried to refund the amounts on deposit with them, as the interest rates being paid by them were above and beyond any other short term investment opportunities.

The interest rate on overdue and overpaid remittances currently paid by the Agency on overpayments is 3%, while the average 90 day Treasury Bill rate is under 0.2 percent. In December 2008 the rate was actually set at 5% when short term rates sat around 1%.

The interest cost related to these overpayments was released in the Auditor General's latest quarterly report along with the $90 million price tag.

We will keep you posted on any developments regarding changes to the rules regarding tax overpayments and the interest being paid out on those overpayments by CRA."

Economist Forecast Update

Thursday, May 21, 2009

"The markets have been moving sideways, but have recently made another surprising run to retest the highs. This market has been unbelievably resilient, and we haven't seen a rally this strong in the 20 years of this newsletter's history. But, paradoxically this is more a sign of a bear market rally than a new bull market. Long-term bull markets move up in a stair-step fashion and build bases along the way -- that gives them staying power. The last strong bear market rally like this one occurred from 1975 into early 1976, and then the markets were ultimately down into late 1982. This rally is also very similar to the bear market rally from late 2001 into early 2002, which would also suggest a brief setback and then a rally to new highs--and then another crash to new lows into next year.

Trader sentiment on the S&P 500 has moved from 2% to 85% in just two months. The peak in October 2007 was at 89%. That is simply nuts -- and sooner, or hopefully later -- this market is cruising for a bruising with that type of manic behavior. How could traders be nearly as bullish as late 2007, after the massive shocks to our financial systems and the massive debt taken on by the government? This proves what the analysis from Lowry's has been saying about their measurements showing that supply or selling pressure had not been exhausted at the March 9 bottom, and hence that was very likely not the final bottom. Also, you would expect to see P/E ratios in the 5 - 8 range for a major bottom, not the 12 that we saw in early March.

The key index to watch is currently the XLF, the ETF for financial stocks. If it can hold $11.25, then it is still possible that we could see one final rally next week to 8,800 plus on the Dow which would start to form a larger reverse head-and-shoulders pattern that would both suggest a larger pullback into June and targets over 11,000 to follow. But the more likely scenario is that we break below $11.25 and then go back to around $9.40 on the XLF and 7,800 on the Dow, more in line with what we have been expecting."

Tax Specialist Alert

Friday, May 8, 2009

"Budget 2009 increased the maximum amount that can be removed from a taxpayer's RRSP under the Home Buyers' Plan to $25,000 for withdrawals after January 27, 2009. Application for withdrawal of RRSP amounts is made on Form T1036 Home Buyers' Plan (HBP) Request to Withdraw Funds from an RRSP. The CRA has released an updated Form 1036, click here to access the form.

In the same budget a First Time Home Buyers' Tax Credit was introduced. This credit is a non-refundable tax credit based on $5,000 for first time buyers who purchase a home after January 27, 2009 (closing date must be after that date). The credit is claimable in the year the home is acquired.

The Home Buyers' Plan allows first-time home buyers (or those who have not owned a home in the current year or preceding four years) to withdraw (under S. 146.01), on a tax-free basis, up to $25,000 (after January 27, 2009) of funds saved within their Registered Retirement Savings Plan (RRSP) for the purpose of buying or building a home. No tax will be withheld on such withdrawals. The withdrawals may be a single amount or the taxpayer may make a series of withdrawals throughout the year as long as the total does not exceed $25,000. Tax-free withdrawals from an RRSP may also be made for the purpose of making home renovations or purchasing a compatible home to meet the needs of a disabled person.
The funds must be repaid back into the RRSP, over a period not exceeding 15 years, beginning in the second calendar year after the withdrawal. Amounts which are due and not repaid are included in the taxpayer's income under S. 56(1)(h.1) in the year they are due.

The taxpayer and their spouse or common-law partner may each participate in the plan and together withdraw up to $50,000 after January 27, 2009 from their respective RRSP's.

Disabled Persons

For HBP purposes, a disabled person is an individual who qualifies for the disability amount or a person related by blood, marriage, or adoption to a person who is eligible to claim the disability amount for the year of the HBP withdrawal. Disabled persons need not be first-time homebuyers to participate in the HBP.

Qualifying Homes

A qualifying home is a housing unit located in Canada. This includes existing homes and those being constructed. Single-family homes, semi-detached homes, townhouses, mobile homes, condominium units, and apartments in duplexes, triplexes, fourplexes, or apartment buildings, all qualify. A share in a co-operative housing corporation that entitles the taxpayer to possess, and gives the taxpayer an equity interest in, a housing unit located in Canada also qualifies.

Canceling Participation

If the taxpayer receives the funds from the RRSP but does not buy or build the home (and does not buy or build a replacement home), they may cancel their participation in the plan by contributing the funds back into the RRSP and notifying CRA of the cancellation. CRA provides a form in the Home Buyers' Plan Guide for this purpose. Any amount not recontributed to the RRSP will be considered income in the year received.

Filing Requirements

Members of the Home Buyers' Plan must file a tax return each year until their HBP balance is zero, regardless of whether they are otherwise required to file. Once payments begin, the taxpayer must report on Schedule 7 RRSP Unused Contributions, Transfers, and HBP or LLP Activities each year the amount of RRSP contributions designated as a repayment under the Home Buyers' Plan. These contributions are not considered to be an RRSP contribution and therefore do not require RRSP contribution room and are not deductible. If no contribution is made or the contributions are not designated as a HBP repayment, then the required repayment for the year will be included in the taxpayer's income on line 129.
After the end of the year that the taxpayer turns 71, repayments can no longer be made to the HBP because the taxpayer may no longer contribute to his RRSP. Thus, in the year the taxpayer turns 71, if there is an outstanding HBP balance, the taxpayer must elect to pay the outstanding balance or include in income each year the required annual repayment.

Emigration

If a HBP participant becomes a non-resident, the outstanding balance must be repaid before the return for the year of emigration is filed but no later than 60 days after becoming a non-resident.

Death of Participant
In the year of death, the full outstanding amount under the Home Buyers' Plan must be repaid (or included in income of the taxpayer) unless, at the time of death, the taxpayer had a spouse or common-law partner and that individual elects (under S. 146.01(7)) jointly with the deceased's legal representative (often the same person) to make the payments under the Home Buyers' Plan and have the income inclusion not apply to the deceased taxpayer. This election may be made in the form of a letter attached to the deceased taxpayer's final return.

If the election is made, the balance transferred must be repaid over the same period that applied to the deceased unless the survivor is also a participant under the HBP. If the survivor is a participant, the transferred amount must be repaid over the same period as the survivor's other HBP balance."

Economist Forecast Update

Thursday, May 7, 2009

"The markets look they may have made a peak this morning on continued "good news" such that more traders seem to finally be selling into the rally. Trader sentiment on the S&P 500 and Nasdaq have reached 80%, not that far from the overall peak in October 2007, which is very overbought for this early in the rally. We are likely to now see the sideways to downward movement for a few weeks that we have been expecting with the most likely target around 7,800 on the Dow in late May. If we hold near 7,800, we could then see another rally of approximate equal magnitude and duration that would peak near 10,000 around mid- to late July even as the previous reverse head-and-shoulder patterns likely become less applicable."

Economist Forecast Update

Tuesday, May 5, 2009

"The Dow did close over 8,400 and the S&P 500 above 900 -- a clear sign of strength despite extreme overbought readings. Yesterday was a 90% upside day and you would expect a minor pullback today, which creates a very short term buying opportunity for traders. The next resistance on the broader indices comes in at 940 on the S&P 500 and 6,014 on the NYSE.

The January highs were there and the 200-day moving average comes in close to those levels, hence that represents very strong resistance. Although the Nasdaq has punched just through its 200-day moving average, it is unlikely the broader indices will make it through these levels without a pullback. The "stress test" on the banks will be a big report on Thursday. Our guess at this point is that we will finally start to see a minor sideways correction back towards 7,800 on the Dow starting on Thursday or Friday."

Economist Forecast Update

Monday, May 4, 2009

"The markets continue to push above the 8,300 level today. Given how overbought stocks are this could still be a fake break-out. But if the Dow can close above 8,400 the odds of a continued move up would be much more likely. The stress test report on the banks with its delayed release on May 7 could be critical for stocks breaking up further or finally starting to correct a bit. It is anticipated that the news from this will be more favorable, but that actually makes the odds for disappointment higher, as the bar has now been set quite high.

The Weekly Leading Index continues to move upward and some level of recovery is looking more likely. The markets now seem to be doing the opposite of what they did on the way down. Before, they got progressively more oversold with little reprieve and now they are getting progressively more overbought. This momentum is a bullish sign just as the extreme downward momentum before was more of a bearish sign. Under more normal conditions that would not be the case as extreme readings are usually strong contrary signals. But obviously the dynamics are different in longer term secular bear markets like this one. We will keep you updated."

Economist Forecast Update
Thursday, April 16, 2009

"The markets continue to be very overbought and look like they are peaking for now. After more than 5 weeks up, the markets are likely to move sideways to down into the latter part of May. We would expect the next buy target to come more in the higher end of our range, between 7,260 and 7,440 on the Dow. After that point, we would continue to expect the markets to rally towards 9,650 - 10,400 by mid-July or so."

Tax Specialist Alert

Friday, April 17, 2009

"The CRA is warning taxpayers about numerous schemes making the rounds regarding registered retirement savings plans (RRSP) and registered retirement income funds (RRIF) withdrawals.  The tax alert warns that these schemes can have a drastic effect on your retirement savings and the possibility of reassessments on your tax returns.  In fact, CRA has reassessed over 5,000 taxpayers who engaged in these schemes, producing an additional $250 million in taxable income from the reassessments.    Schemes to be avoided may be presented as follows:

• Get immediate access to locked in RRSP's and RRIF's
• Income tax receipts equal to three or more times the amount originally invested
• Returns on investments that are not realistic
• Ability to withdraw funds from RRSP and RRIF accounts with no tax penalties

The people who are presenting these offers to taxpayers will usually direct them to purchase an investment, such as shares in a company or participation units in a co-op, through a specified trustee.    These promotional schemes can put your savings in a precarious position because in some cases the promoter will walk away with the funds.  No matter the sales pitch, the full amount of any withdrawals or an ineligible investment will be included in the taxpayer's income for the year in which it was made, and may be subject to interest and penalties.   We would advise anyone considering such an investment to contact their tax or accounting professional to seek advice before investing."

Tax Specialist Alert

Friday, April 22, 2009

When it comes to income taxes, always think long term
"The majority of Canadians will die in old age—that is, after age 65 and most will qualify for some type of public pension like the Old Age Security or the Canada Pension Plan. But in addition, many people will have private pension accumulations to supplement their cash flow needs, which is good, because unknowns like higher taxes or inflation must be planned for.
Do you need to worry about that at age 24? Not really, but if you resolve to minimize your taxes throughout your lifetime, starting now, you'll be able to focus on accumulating wealth sooner and longer, and that's the recipe for a prosperous retirement with peace of mind.
It is the young who have the potential to accumulate the most wealth. When they take advantage of make their savings in RRSP's or the new Tax Free Savings Accounts, the combination of tax savings and tax preferred income growth will amount to significant long term deposits.
Don't miss out on tax-advantaged wealth creation, just because you are young."

Stay out of the "hot water"
The tax department will often assess a return as filed—and even send you the refund money you asked for—only to audit you later, and then ask for the money back, with interest, if they disagree with your filings.
People are often surprised when this happens, but the Income Tax Act makes it clear, that the taxman does not have to accept your return as filed.
In addition, the onus of proof is on you. It is up to you to prove that you have not understated your income, or overstated your tax deductions or credits. If you can't do that, you may be found grossly negligent, which attracts a penalty of 50% of the taxes you owe.
Worse, if the return was prepared fraudulently—that is, with a willful intent to cheat the government, you will be charged with a criminal offence as a tax evader. The crime of tax evasion is punishable by financial penalty—up to 200% of the tax evaded, plus interest and gross negligence penalties too—and/or jail.
Tax avoidance, on the other hand, is legal. It involves arranging your affairs within the framework of the law to pay the least taxes possible. Knowing the difference between the two can keep you out of hot water with the tax department, and save you a lot of time and money.

Economist Forecast Update

Monday, April 27, 2009

"The markets are very close to testing the declining trendline which makes a neckline for a reverse head and shoulders pattern. Today's reversal rally up is not likely to exceed 8,150 or 8,200 at the most. 8,150 would be a good short term sell signal for shorter term traders. There are actually two potential reverse head and shoulder patterns that we will cover in the May issue -- one would be shorter and see a more shallow correction, the other is longer and would see a bit deeper correction. We still expect stocks to correct into late May or so unless the Dow can break convincingly above 8,200."

Economist Forecast Update

Wednesday, April 29, 2009

The market has broken above 8,200 but it is so overbought it is unlikely that the rally will sustain. This does not yet create a new buy signal and we still think that the markets are heading down a bit sooner or later into May.

 

Investment Options

How to invest your money:

30 key personal investment opportunities

1. Annuity
2. Bond, Corporate (interest-bearing)
3. Closed-end fund
4. Collectibles
5. Common stock
6. Convertible security
7. Exchange-traded funds
8. Foreign stocks and bonds
9. Futures contract on a commodity
10. Futures contract on an interest rate
11. Futures contract on a stock index
12. Government agency security
13. Life insurance (cash value)
14. Money market fund
15. Mortgage-backed (pass-through) security
16. Municipal security
17. Mutual funds (open end)
18. Option contract (put or call)
19. Options Contract on a Futures Contract (Futures Option)
20. Option contract on an interest rate (debt option)
21. Option contract on a stock index
22. Option contract or futures contract on a currency
23. Precious metals
24. Preferred stock (nonconvertible)
25. Real estate investment trust (REIT and FREIT)
26. Real estate, physical
27. Savings alternatives
28. Treasury securities (bills, bonds, and notes)
29. Unit investment trust
30. Zero-coupon security

 

Services

Financial Services

1. Funding For:

• Capital Gains Tax Liabilities
• Survivorship Agreements
• Shareholder/Partnership Buyout
• Business Succession

2.  Wealth Accumulation

3.  Retirement Planning

4.  Estate Planning

5.  Personal Insurance Planning

Products

1.  Life Insurance

2.  Critical Illness Insurance

3.  Disability Insurance

4.  Long Term Care

5.  RRSP/RRIF/LIF/Annuities

6.  Investment Funds

7.  RESP

8.  Alternative Investment Products

9.  Private Equity and Venture Capital

Employee Benefit Plans

• Life and Health
• Pension/DPSP
• Group RRSP